The UK’s new Long-Term Asset Fund (LTAF)
As part of the UK government’s review of the UK funds regime, the Financial Conduct Authority (FCA) introduced a new authorised fund regime for investing in long term assets by publishing PS21/14 in October 2021, which came into force on 15 November 2021. The new rules are in chapter 15 of the Collective Investment Schemes (COLL) Sourcebook.
Defined Contribution (DC) pension schemes traditionally invest in liquid assets, such as equities, bonds and daily valued and dealt funds. The LTAF’s structure facilitates investment in longer-term illiquid assets and advances the FCA’s strategic objective of addressing market failures, particularly that of DC pension schemes not investing in such illiquid assets.
Further to this, the FCA along with the Bank of England (BoE) and the Treasury set up the Productive Finance Working Group (PFWG) to facilitate investment in LTAFs by creating an environment to encourage these types of investments.
What are the benefits of an LTAF?
An LTAF is a UK authorised fund which offers greater flexibility in terms of assets that it can invest in than other types of UK authorised fund. It has more liquidity than more traditional fund structures such as private equity limited partnerships.
Pension savers and investors have access to long-term investments, and similarly, projects involving infrastructure (for instance) will have access to long-term capital. Given the long-term nature of LTAFs, environmental, social and governance (ESG) factors may be considered as part of the investment process - especially in relation to access to green finance.
What is an LTAF and how are assets held?
It is authorised, open-ended, alternative investment fund. It can take the form of an investment company with variable capital (OEIC), an authorised contractual scheme (ACS) or an authorised unit trust (AUT).
An LTAF can be structured as an umbrella fund with sub-funds, is authorised by the FCA and requires an authorised investment fund manager (AIFM) and a depositary.
As LTAF assets are illiquid, the daily pricing, redemption and issue of shares or units in traditional UK authorised funds is not appropriate. Redemptions may be made no more then monthly and only after a minimum 90-day notice period.
DC schemes carry a high level of flexibility in terms of members switching funds and being able to transfer or elect to receive their pension at any point after reaching the minimum pension age. Whilst DC schemes would appreciate short-term access to capital via redemptions for these reasons, AIFMs must set appropriate redemption terms in accordance with (i) the liquidity profile of the fund and (ii) the fund’s investment strategy. The LTAF can utilise risk management tools to manage liquidity such as gating, to prevent sharp market outflows. Such tools will need to be disclosed to investors, in addition to how these will be used.
Who can invest in an LTAF?
Professional clients (such as DC schemes, investment firms and insurance companies amongst others) and certain types of retail clients (such as high net worth investors, certified sophisticated investors and self-certified sophisticated investors).
How can an LTAF be marketed?
The UK regulatory regime has restrictions on how LTAFs can be promoted as LTAFs are non-mainstream pooled investments (NMPIs). They can only be marketed to those professional clients and the categories of retail clients summarised above.
What can an LTAF invest in?
Assets that are long-term and illiquid in nature, or in other collective investment schemes investing in such assets. This includes real estate, private equity, private credit, venture capital and collective investment vehicles investing in private asset classes (including limited partnerships).
Costs and charges?
The AIFM must ensure that the LTAF offers value to its investors which is relative to the fees charged. This assessment is slightly more onerous when compared to other UK regulated funds, as the AIFM will need to consider matters such as asset valuation and liquidity and how these benefit the LTAF and its investors.
The fee structure also interacts with the charge cap applicable to DC pension schemes which is 75bps. AIFMs therefore need to ensure that their proposed fee structure complies with existing regulations, specifically those applicable to DC schemes. This however is currently under review by the UK government.
Are there tax benefits?
An LTAF structured as an ACS should be tax transparent and enable tax exempt investors such as pension schemes to maintain their tax exemptions. Certain authorised funds are required to meet the genuine diversity of ownership (GDO) condition to access beneficial tax treatment. An LTAF will meet the GDO condition where at least 70% of the units or shares in the LTAF are held by one or more relevant investors (such as an AUT/OEIC meeting the GDO condition, a sovereign wealth fund or a trustee/manager of a pension scheme, excluding an investment regulated pension scheme). Meeting the GDO tax condition means that daily dealings in equities or securities will not be treated as trading activities.
The LTAF comes alongside developments like the Qualifying Asset Holding Company (QAHC) regime and other UK government initiatives which provide investors with different fund types to match their needs. The LTAF is specifically geared toward long-term investment which is key when investors are considering their overall portfolio.
There is continuous work on the LTAF regime by the PFWG, the FCA (regarding the promotion of LTAFs to other types of retail investors) and HMRC (regarding the tax treatment of the LTAF) which may result in further enhancements in the future.
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